Marks and Spencer Group PLC

LSE:MKS

Earnings Call Transcript 2018-Q4

[Archie Norman, Chairman]

Okay, good morning, everybody, and welcome to the M&S results. The fact that we are here is a sort of improvement in itself because it means that we no longer have enough space in Paddington to accommodate you all. So, look, Steve and Scilla are going to make the presentation today, but I – before we start, I did just want to mention the various members of our transformation team in the room. And they’re here, hopefully, not just to be part of the audience, but they’ll be available to talk to you and give you a lowdown after the meeting.

So, I’m going to miss somebody else, not to upset somebody, but so Jill McDonald is in the third row here; Stuart is, Stuart Machin, fourth row here; Sacha Berendji, Sacha waving from the back; Paul Friston. Paul Friston runs the International team. And anybody else want to introduce themselves? No. Right, well, look, as far as the results are concerned today, I just wanted to be quite clear that as Chairman my view of these results is they’re on track with where I expected them to be. I don’t know where you expected them to be. If anything, we were slightly ahead of where we might have been.

So, there’s not a lot of news in that in itself. The news today is the business is starting to change. And I think you are going to see today a presentation about Marks & Spencer, where we are, the challenges we face and where we’re headed that no other Chief Executive would have made. So, this is I want to say, I’d like to say it’s historic, but I’m going to say a very important moment in our history. And what I want you to take out of this is not that we’re turning around the business. It would be premature to say that. What I want you to take out of it is we have a very strong team of people who are going to have a bloody good shot at it and that interesting things are starting to happen at M&S. Because that’s what I feel. Steve?

[Steve Rowe, Chief Executive Officer]

Good morning, all. And as Archie said, welcome to the London Stock Exchange. The reason we’re here is we are absolutely on schedule with our move out of Merchant Square and the transformation of Waterside House.

The agenda for today. Well, I’m going to start with a summary of really what we told you in November last year. Scilla is then going to talk you through the numbers as they stand. And then I will come back and address the plans for changing the business and how we’re progressing with them.

These results, frankly, illustrate why we have to transform the business, why we have to accelerate that change and why there’s no other option for it. The trading numbers speak for themselves. We grew the business marginally, but the like-for-like performance in Clothing & Home and Food was disappointing. Even our .com performance, which was 5% up, was behind the market. And we know that the scale of change meant that the adjusting items were substantial, but this illustrates the velocity of change and indeed our commitment to it. We’re very, very clear that, if we want to make Marks & Spencer special again, accelerating the change is the only option.

Now, in November I talked to you about a transformation journey, a journey that started with the business having to have a clear, right view of the facts; no illusion; no mystery. And we started looking at those facts very carefully and we put down some fires, but that’s not enough to transform the business. The real transformation starts with us restoring the basics and shaping M&S for the future. And we talked about six key areas where Marks & Spencer had to change and have to accelerate it. I believe that, if we do these, then we can return the business to sustainable, profitable growth; and make M&S special again.

Now, we know and you know, you’ve talked to us about this, that it starts with the culture; a culture that’s been seen as slow, as bureaucratic and overly matrixed. To change the culture, you have to change the people and the ways of working. We’ve had too many layers. We’ve had too many corporate functions that interfere with the day-to-day running of the business, and we’ve lacked accountability in key areas. We need to simplify the business to make it faster, lower cost, more commercial and more digital for the future if we’re going to transform and modernize Marks & Spencer.

We talked about our Number 1 priority, being digital, but we know that we’re behind the curve in digital. While we’re Number 2 in the market online in Clothing & Home, our growth has not been in line with the market over the last few years. And in actual fact, we’ve been losing share online. We need to have a third of our business online in 5 years. And if we do that, that will maintain our market shares, but our site today is too slow. Our search engines are not optimized. Our delivery and proposition to customers is not best-in-class. And we still have to fill key roles in our digital and data management.

Now in terms of Clothing & Home, we come a long way perhaps from the overly fashionable merchandise we had, but frankly, we’ve still got more to do to restore the star credentials of the business. We invested in price. We cut out the sales and the promotions, but we’ve got to go again. We’ve still got too many lines, too many phases, and we need to make sure the option count of ranging is appropriate for our future.

The customer base, as we said, had narrowed over a number of years. And we need to address this and start to grow our customer base with new customers, younger families; and make sure that M&S is relevant to the British public.

In Food we’ve clearly underperformed. There is no other way to say it. The performance here is disappointing, and whilst we’ve got a great business, our execution has not been good enough over the last 18 months. We’ve got pockets of excellence in product development, but at times over the last year or 18 months, our innovation has not been relevant enough. It’s been too niche. Our prices have drifted from the market.

We’ve been competitive on KVIs, but in some areas, frankly, although we’ve got the best products, the price is too high. And the value is not worth the actual price. And importantly, within the structure of the business we have not managed to improve our waste or availability, and we’re a long way from best-in-class.

Linked to this and linked to the Clothing & Home story is an inefficient supply chain in both areas. In Clothing & Home, we still haven’t got to that single-tier operation. We’ve got too many touch points and too much stock, and that’s affecting our working capital. In Food, it’s slow. Our depots have been outdated. It’s too high cost. And the structure means that we have poor availability and high waste as we move through the store chain.

In terms of our store estate, again last November, we outlined that we had too much square footage, something that you all know. The scale of that was that we needed to close 100 stores, approximately 25% of the Clothing & Home footprint. And we needed to do that urgently. Our return per square foot in stores has dropped consistently for nearly 10 years, and we need to make sure the returns are best-in-class in terms of our returns. We also need to make sure that, that estate is modernized, without stores that are more than 75 years old. And we need to make sure the estate is really for a changing multichannel world.

Now, that’s why we outlined an aggressive plan in a three-stage transformation. We dealt with putting out the fires in the preliminary phase. And I’m pleased with the results and the actions of the team, but importantly, this phase we’re in now has to lay the foundations for a business of the future. When I talk to my team, I describe this journey as a marathon. And so, we’re clear about where I think we are. We’re probably about mile 3 or 4. We’re just running down towards Woolwich. We haven’t made it to Cutty Sark yet.

We outlined nine important steps and nine important actions that are underway, and this transformation is underway in this first phase. I’ve always said that I believe we can restore this business and make it special again, that we can grow it and make it relevant for our customers. Our aim, of course, must be to deliver sustainable, profitable growth for the future. And what I’m going to do is come back and share some of those plans with you after Scilla has been through the numbers. Thank you.

[Scilla Grimble, Interim Chief Finance Officer]

Thanks, Steve. And good morning, everyone. I’m now going to take you through the financials for the year. As you’ve seen, group sales grew just under 1%, and that was driven by new space within our Food business. That offset a fall in our Clothing & Home sales as we continued our strategy to reduce discounting; and the fall in International sales, which was predominantly driven by our exit from a number of markets.

As anticipated, profit before tax and adjusting items was lower on the year, and that was in turn driven by lower Food gross margin and higher U.K. operating costs. Profit before tax was negatively impacted by a number of charges relating to our transformation plan, and the most significant of those related to the acceleration of our U.K. store estate plan, but despite this, we’ve remained a strongly cash-generative business. Our free cash flow before adjusting items was significant, and our net debt fell over GBP 100 million. And we’ve maintained our full-year dividend.

So, I’m now going to turn to performance in a little more detail. As Steve said, our Food performance was disappointing. Total sales grew just under 4% as we opened 62 new Simply Food stores, but our like-for-like sales was slightly lower in the year. And that, it was particularly impacted by a softer performance later in the year. And you’ll have seen in our statement this morning we called out the impact of snow in quarter four.

In terms of gross margin, gross margin fell by 140 basis points, and this was more than we’d anticipated. We continued to experience input cost inflation; and our price inflation was below 2% and, we think, below that of the market. We did have some small benefits from waste, as we continued to change the way that we do things in store.

Moving on now to Clothing & Home. As I’ve already said, total sales fell, and that was really as a result of that continuation of our discounting strategy. And you’ll remember that, in the first half, we held two fewer clearance sales. Full-price sales were broadly flat on the year, with the strong performance in the first half offset by those more challenging trading conditions later in the year. And again, you’ll have seen from our statement we’ve estimated that snow in Q4 cost us about 2% of sales.

As Steve said, M&S.com grew over 5%, although that was behind the market. And we do continue to experience capacity constraints at Castle Donington during peak. In gross margin terms, we improved our gross margin by 50 basis points, and that was in-line with expectations. And basically, what we’ve done is continue to drive forward our direct sourcing program, and that’s helped offset currency headwinds.

And you can see from the table that we’ve been able to offset significant currency headwinds in each of the last two years with better buying. Our discounting was broadly flat on the year. As you’ll have seen, in the first half, again there’s two fewer clearance sales held. And stock-into-sale reduced by 8% across the year, but there is more challenging conditions in the second half resulted in an increased depth of cut.

Moving on now to operating costs, where our total operating costs grew just under 2%. And that was slightly lower than expectations. You’ll see that most of that was driven by new space and volume, as we were able to offset inflation with efficiencies within the business. Looking at the areas in a little more detail: Our store staffing costs increased quite significantly, but you’ll remember most of that was driven in the first half, where we were annualizing the prior year service investment.

In terms of other store cost, which was slightly down on the year, we were able to offset the costs of increased space with lower items in areas such as depreciation, lower utilities charges and rates settling at better levels than we’d anticipated. And in marketing we continue to drive forward in-store efficiencies and reduce spend on more traditional media campaigns.

Finally, on central costs, which were broadly flat on the year, we had increased spend in areas such as IT OpEx and the government apprentice levy, but these were offset with lower incentive accruals.

Looking at International. And again, as I’ve said, the total sales fell at a headline level, but that was largely driven by our exit from a number of markets and our sale of our Hong Kong business in December last year. If you adjust for those effects, constant currency sales grew at just under 3%. Our franchise business had a really good, strong year with sales growing nearly 10%. And that was driven by growth in key regions in pre-fulfillment and the expansion of our Food business.

In owned retained sales, which was slightly lower on the year, we had a strong performance in India, but that was offset by more challenging conditions in Ireland. And similarly, to the U.K., we’ve continued our strategy there to reduce discounting in Clothing & Home. As you’ll see and as you’ll have read, International profits increased substantially this year. We delivered our exit plan both on time and under planned costs, and you see the benefit of that program in the reduction in losses year-on-year. In terms of our owned retained business, that profit growth is largely driven by better buying and transactional currency benefits.

So, what does all that mean for the profit of the group as a whole? Well, Food gross profit fell, as that lower gross margin offset the benefit from sales from new space. And in Clothing & Home, we also had lower gross profit, largely reflecting the lower sales in the second half. U.K. operating costs, as we’ve seen, grew just under 2%, and M&S Bank income also fell, and that was largely due to three key items: a modest reduction in interest-bearing balances; a change in effective interest rates; and finally, the adoption of IFRS 9 by the bank, which resulted in higher bad debt provisioning.

We’ve seen International profits have grown substantially, and our interest costs were also slightly higher on the year. That reflected actually lower pension interest income. You’ll remember, at the beginning of the year, we had a lower pension surplus, but you’ll have read in the statement this morning our pension surplus has increased again. And therefore, we expect a benefit to interest income in the year ahead. And obviously profit was impacted by a number of adjusting items, and I’ll now take you through those in a little more detail.

Most of the adjusting items, as I’ve said, relate to our transformation plan and the most significant of which related to our U.K. store estate plan. So, as a result of the acceleration of the program, we’ve taken in the year both impairment and accelerated depreciation charges for those stores which were part of the closure program. And we’ve also taken onerous lease charges where relevant for those stores we’ve announced for closure.

You’ll have seen in the statement that, whilst as a result of the acceleration we expect the total accounting charges to be higher than originally guided, we expect the total cash cost of the program to be broadly the same to about GBP 200 million.

A number of the other items also relate to previously announced aspects of our transformation plan, be they the consolidation of our London Head Offices, our transformation partnership within IT with TCS, the continuation of our single-tier network strategy within Clothing & Home or our previously announced changes to pay and to pensions. And you’ll remember this under U.K. store impairments in the first half we took a one-off noncash charge in relation to the historical under-depreciation of leasehold buildings.

Moving on now to CapEx. And CapEx but remains well controlled and fell 17% on the year. As you’ll see from the chart on the right-hand side, we’re moving now to be more evenly spread between BAU, efficiency and growth. And as we guided at the interims, we anticipate that the shares of efficiency and growth will continue to grow in the coming years. IT spend now represents less than a third of the group total and fell year-on-year, and that reflects both the completion of some significant programs in the prior year and also investment in other areas such as in-store WiFi and handheld devices.

Whilst we opened more stores this year than last, 40 compared with 35, spend on U.K. stores did fall. And that largely reflects the purchase of a freehold in the prior year. And in terms of our supply chain spend, which also reduced this year, that also reflects completion of some more significant programs, including our Bradford DC.

Turning to cash. And as I’ve said, we remain a strongly cash-generative business. And we generated over 100 million of net cash flow for the year. Working capital did increase though; and that was reflecting both our exit from International markets, lower incentive accruals and higher Clothing & Home stock at year-end. And that stock really reflects some of our strategic initiatives, earlier timing of intake during the half and also the impact of bad weather during quarter four. As you’d expect, cash CapEx at broadly GBP 350 million relates to both CapEx in year and payment to the prior year creditor.

And in terms of adjusting items in cash flow at 165 million, and we footnoted this on the slide, that’s largely driven by our International exit costs and the PPI bank provision and also our previously announced transitional payments for pay and to premia. And nestled within there are our cash proceeds from the sale of our business in Hong Kong.

So, turning finally now to guidance for the year. We anticipate that within Food our space will be broadly level at year-end, and that is a continuation of our expansion of Simply Food stores being offset with the closure of less-productive space within our full-line stores. We expect that Food gross margin would fall by up to 50 basis points as we annualize some input cost inflation.

And within Clothing & Home, we expect a space reduction of 5% at year-end, and that’s again as a result of that acceleration of the closure of less-productive space within our full-line stores. And gross margin within Clothing & Home, we anticipate, will increase by up to 50 basis points as we continue to drive our direct sourcing program.

In terms of U.K. operating costs, we expect that they’ll fall in the year between flat and down 1%. And that’s largely driven by a continuation of our cost savings and efficiencies offsetting the costs of new space and volume. And particularly within operating costs we expect that depreciation will fall something in the region of GBP 40 million in the year ahead, partly reflecting the impairment charges we’ve taken in the year and also reflecting that a number of historic investments are becoming fully depreciated in the year ahead.

In terms of our tax rate, we expect that, that will be about 22% as a result of our Scottish Limited Partnership structure. And finally, in terms of CapEx, we expect that to be in the region of GBP 350 million to GBP 400 million, as we continued our investment into our Clothing & Home distribution network.

Thanks very much, and I’ll hand you back to Steve.

[Steve Rowe, Chief Executive Officer]

Good stuff. Thank you very much, Scilla, for that comprehensive review of the numbers and the guidance. And as I said right at the start of the program, those results clearly demonstrate why this business must change and why that transformation must be accelerated if we want that sustainable growth. Now to remind you: These are those nine key areas of action in the first phase of restoring the basics.

We’re going to talk through those in more detail, but you can see they are very comprehensive. They cover every area of the business, whether it be range structure, culture, people, supply chain and importantly the cost base of our business, which has been too high for too long. We need to make sure that we deliver against all of these with our objective of sustainable, profitable growth.

I said culture was key, and it is. We’ve got to fracture some of that cultural impasse in the business. We need to make sure that we implement our new operating model to give clear accountability to the managing directors of the two businesses. And we should remember that Marks & Spencer is a family of businesses underpinned by common customers, a common culture, a common value and indeed a common brand, but we need to make sure those businesses are operated with true accountability, full P&L accountability. And to do that, our MDs have autonomy to make the right decisions.

We’ve streamlined our corporate center. And we will continue to do so because we must make the business simpler, faster, lower cost, more commercial, more agile. It started in terms of transformation. And it’s probably one of the largest transformations in a retail business ever with these two MDs, as I said. I believe we are assembling a world-class team of individuals and, as I said, supported by changes to those central functions.

Importantly, we’ll be delighted to welcome Humphrey as the CFO at the end of June, beginning of July. We have more to do. We have to become world class in our data analytics and in our digital development, and we’ll be working on that over the next few months.

In terms of that digital development, it’s imperative, a third of our business online. And we’re not best-in-class. What we’re working on now are the real basics, the speed of our sites, the PD pages. I’m pleased we’ve made some improvements. The PDP load rate has come down from over 4 seconds, one of the worst in the industry, to just under 3 for the first time. Unfortunately, our payment speed is still over 4 seconds.

We need to make sure we are working our digital marketing. We’ve developed with Instagram one of the first retail solutions, but these are just small stepping stones to giving us a first-class digital operation. We need to rebuild our pages. We need to make sure that the front end of our website is seamless on any device, whether it be on mobile, a laptop or a tablet. And importantly, we must upgrade our search capability, whether it be through Google or even internal search on the website.

Now these key activities are all underway, but we’ve got much more to do. Importantly, we need to make sure that our proposition from Donington is robust. We’ve got plans to make sure that, the next two years, we can upgrade the proposition, but we will be working on a new solution for our e-com distribution over the next two years. I know we’re Number 2, but we could do so much better. And I do believe that, if we fulfill these basic things, we can start to move forward with an online operation, which will deliver a third of the business.

Now in-store, we’ve talked to you before about the rollout of Honeywell’s, small handheld devices that make our operation much more efficient. What have we done now? Well, we’ve upgraded the number of apps available on Honeywell, whether it be from stock accuracy to ordering from the fridges. There are more than 10,000 of these in circulation in stores now, and we’re continuing to increase the numbers. We’re also building our own apps for labor scheduling, which we’ll roll out during the course of the summer; and also, for other M&S-designed apps in our food-ordering system.

What are the next stages? Well, the first thing we have to do is make sure that our collection of online merchandise in store is more appropriate for the future. 72% of our merchandise sold online is distributed through a store. We need to make sure that, that environment is welcoming and appropriate. We need to make sure we modernize customer payments, whether that’s online or in stores. And I can tell you that we will be putting scan, pay, go into the new Food store underneath Waterside House. And importantly, we need to embrace new technology partnerships. We’re working on that now, and we’ll talk to you about that in the near future.

In Clothing & Home wear, well, we’ve got to continue to feature and focus on those core wardrobe essentials; making sure we’ve got contemporary, wearable stylish clothes delivered in an appropriate way with the right products at the right price to our customers. We need to continue to maximize the joining points in our business; those departments I’ve talked to you about before, Schoolwear, Kidswear, bras, denim, suits, shirts.

We’ve made good progress. And as I said on the call this morning, for the first time in seven years, Womenswear has gained some customers. Now let’s be clear. Having had several years of losing customers, this tiny smidgen is not a victory, but it’s an important step. And it makes us sure that we are doing the right thing in these areas.

We must continue from these good foundations. We need to continue to reduce the number of phases in the business, make sure our ranges are simpler. And we’ll reduce the number of lines again this year by 13%. We’ve got to continue to focus on value. And again, our "Love it for less" campaign, which is in stores today, will continue to show customers great-value products.

In Food. I am clear our Food business has underperformed. There is no shying away from that, and I will not do that. What have we got to do now, right now? Well, Stuart’s joined. He is working very hard. And he’s already making an impression, I can tell you, on the Food team. We have to make sure we get our prices right immediately. We’re investing in price some 100 bps, but that will be offset by the savings that we have in things like packaging and efficiencies within our supply chain.

And that as well, that will impact the guidance. It’s execution things, availability, movement of goods. And I think you all know that Lawrence Christensen has joined the team, and he’s looking at the whole end-to-end supply chain within Food. We’ve already got results in our pilot stores. And last week, 27 academy stores were the first phase of the cascade.

We also need to make sure that our customers understand why there is a difference in price. We need to communicate the quality difference and the prevalence in our merchandise. We’ve done that with a best-ever burger and with our traceability in beef, but we’ve got more to do here.

In terms of next stages, well, Stuart is going to get straight into range reviews, making sure that our product is relevant for our customer base and relevant to families to broaden its appeal. And we’re doing that through a series of category resets we start right now but run through until the autumn.

Importantly, within those resets we will address our price architecture, maintaining our stance with KVIs, offering value at every tier within the Food business. Using the work, we’re doing on the supply chain, we need to start to work on best practices on waste and availability and getting the balance right between the two. And then as we move forward from there, we’re starting to look at how we refresh our format and make sure that again helps us recover our appeal to our core customers.

The supply chain is one of the fundamental things we’ve got to change. Now, you’ve heard already in quarter four about our purchase of Welham Green and the closure of two other DCs. That’s an important step in that movement towards a single-tier network. I’ve told you about increasing the capacity at Donington, and that program is well underway and we’ve invested in it to make sure we’re on track for next Christmas. I can’t emphasize enough, though, that this is not the solution to get us to a third online. We will need another solution.

What are the next stages here? Well, we’ve got to complete that single-tier network. We’ve got too many touches in our supply chain, and it’s too slow. We’re going to review the end-to-end buying process in the same way that we’re doing it in foods to make sure it’s more efficient and importantly here reduce the forward cover and improve our working capital. At the same time, we’ll continue to drive down markdowns and costs of clearance.

There are big opportunities throughout the supply chain to reduce our costs and, importantly, improve our working capital. In terms of the Food business, well, I’ve mentioned those 27 academies. The first phase of this is really about processing improvement, changing how we do things, using new apps within the Honeywells to make sure that the merchandise we put in stores and move around stores is far more efficient. I’ve talked to you before about the fact that our tray sizes are not appropriate to our sell-through rates.

A huge amount of work has been done now to make sure we get the right tray size. And about a third of our trays will change in terms of the numbers of items in them, but importantly, we’ve got work to do on our stock file. And the new app we’ve launched is showing substantial improvements in accuracy within our stores. The next phase, well, we go back into replenishment models, operating models, to make sure that we’re effective in our store processes and make sure that we remove excess stock from stores.

Frankly, the plan here is to remove backstage racking, backstage stock; and make sure it stays up the chain rather than distributed to stores. Again, here a major program and a major cost-out opportunity, but from our customers’ point of view, the real benefit will be better availability and better-looking shops.

Moving on to the store program. Now, despite what it says in the media, last November, we outlined that we were going to close 100 stores. We increased the rate of that, and we said we would do this in 2 to 3 years. Why was that? The initial responses we had from the store closures in the pilots last summer and again in the spring have exceeded our expectations for the transfer rate of customers and business as customers found bigger, better shops rather than some of the old high street stores, so many of which are 75 years old, which cloud our brand and don’t show the best of M&S.

We’ve decoupled these closures from the openings of Simply Food and other full-line stores. We’re making sure we tackle this on a store-by-store basis to optimize the work we can do with landlords, on leases and with councils. Again, here we want to make sure that we’re doing the right thing by our colleagues, but importantly the right thing by our shareholders, modernizing the estate and making sure it’s fit for the future.

What will be the net result of that? Well, we’ll continue with the store closure program. I expect to be somewhere around 40% of the way through this by the time we get to the autumn. And as we do, we intend to have a better-quality estate with higher return per square foot. And importantly, we’ll then reassess what we need to do to make that truly appropriate for a multichannel future.

In terms of our International business, the team did a great job closing out on time, under budget, as Scilla said. The next stage of this is really to focus on strengthening our three key partnerships in our major markets. We’ve got good partners, but we need to make sure that they start to grow. An important part of that has been to get market-right pricing in every territory.

It’s the same thing as we’re doing in the U.K., making sure our value stack up against the competition. And I can tell you, to get that right in Ireland in Food business, a couple of hundred lines are coming down in price or came down in price this morning. Importantly, we need to return this business to growth. And the next stage of it will be to continue to roll out the market-right pricing to the smaller territories, but also importantly to start localizing our offer, making it more relevant. And importantly, in terms of a digital business, we need to extend our flagship websites in these territories and make them fit for the future too.

The all-important cost base. I talked about a business that was too costly and operating costs of about 3.4 billion, and I described last year that we had three buckets of costs: the legacy costs, our old store estate, the mainframe system that we’re still on. I described there are structural costs; the supply chain we just talked about; the way we work; and in behavioral, that ability in M&S to add an extra 10% or gild the lily, the packaging that’s too expensive.

Programs are in place across the business to deliver these. We will make sure that, as I said earlier, we’ll use part of this fund to make sure we right-price food and offset inflation within the operating costs, but it’s a three-year program. But I do have visibility of at least 350 million, as we told you.

So, in summary, where are we? Well, I think we’re making good progress. I can’t say that you can see that in the results, but we have got line of sight and actual plans in all areas. There is much more to do. This is a five-year transformation program, but it’s well and truly underway. This action on a number of fronts, I believe, is the starting point, that springboard to deliver sustainable, profitable growth; and importantly, make Marks & Spencer special again.

Thank you, very much. We’ll now take your questions.

[Archie Norman, Chairman]

Good. Thank you, Steve. That was terrific. I think you can see one of the exciting things about M&S is not just sort of headwinds or even challenges that we face, but the scope for change and the improvement in performance, which at the end of the day, if we can deliver this, is a really worthwhile thing not just for shareholders but for all the stakeholders in the country.

I did just want to thank Scilla. I mean Scilla, as you know, is Acting Finance Director. She’s – we’re waiting for Humphrey Singer to arrive. He seems to be taking forever, but it gave us sort of sight that this is one presentation that Scilla could make. And he will doubtless claim the credit when he turns up.

We’ll take some questions. Could you please just give us your name and number. And it’d be quite helpful to have one question at a time. You can have the second bite of the cherry if you like, okay? Andy, do you want to start?

[Andrew Hughes, UBS]

Thanks very much. Andy Hughes from UBS. Can I just clarify on the store estate changes? So, we’re going to lose 25% of non-food floor space. You said 10% done by the autumn. Does that not give 10% decline, not the 5% you put in guidance? Or was that just a timing issue?

[Steve Rowe, Chief Executive Officer]

No. This is a really important thing that we have to sort of understand about why we’re doing this. The footprint we’re removing from the business is the worst-performing, lowest-RPI footprint. And broadly as we move the business into our larger stores, you get a substantial increase, so in actual fact, against that sort of measure, I would say only half of that is reflected in the sales.

[Andrew Hughes, UBS]

All right, okay. So, it’s 10% of space, and 5% is the sales impact you expect.

[Steve Rowe, Chief Executive Officer]

Yes, right...

[Scilla Grimble, Interim Chief Finance Officer]

So, we look to 10% basically by the end of the year. So, we’ve done some in the year we just finished. I mean obviously we’ve given you a net space number for the year ahead, but Steve is exactly right in terms of the impact on sales.

[Andrew Hughes, UBS]

All right, okay. If I can have my second bite then at the same time: Your balance sheet pension surplus, 950 million. So, I mean, who knows what the actuarial surplus will be? But your property partnership in the pension scheme now. The NPV of rents there is below 350 million. Could you scrap that? Are you thinking of scrapping it? And what will be the potential benefit? I mean you mentioned that tax rate might be a bit higher. As a result of that, will you get a tax charge reduction? So, is any or all of that on the cards?

[Scilla Grimble, Interim Chief Finance Officer]

Yes. No, we can’t scrap it. Obviously, we had our last actuarial valuation, and we’re about to embark on a new one. And the last one showed a surplus of just over 200 million. And clearly that’s the measure that trustees would look at rather than the accounting surplus.

[Archie Norman, Chairman]

Okay, okay, thanks, Andy. All right, come to the front here. Then we’ll work backwards.

[Charlie Muir-Sands, Deutsche Bank]

Good morning. It’s Charlie Muir-Sands from Deutsche Bank. I’ve got loads of question, but I’ll restrain myself to three, please. The first one is the plan to...

[Archie Norman, Chairman]

Two...

[Charlie Muir-Sands, Deutsche Bank]

Two. Two with two parts. Your plan to further rationalize clothing ranges, is there a risk you become too basic and too boring? And how do you think about that? And then the second one, I think, on the...

[Archie Norman, Chairman]

Let’s hit that one.

[Charlie Muir-Sands, Deutsche Bank]

Okay, yes.

[Steve Rowe, Chief Executive Officer]

I mean, let’s be clear. There’s different ways we can rationalize. I mentioned earlier we have too many phases. We’ve come down from 14 phases in Womenswear to 9, I believe. And I know that Jill believes that we can take another couple of those out, so that further reduces it, but within our merchandise what we will do is make sure we’ve got newness flowing through the system all the time. But we will take out the duplication in some of those core areas, the favorite wear, black trousers, in ladieswear, racks of them. And we’ve taken some out already. We took out 15% of that lines. We’re going to take another 13% out, but what we will do is transfer that sales on to core lines, drive our volumes. And that’s important if we’re going to get into the positive cycle of greater volumes, lower prices and better values.

[Charlie Muir-Sands, Deutsche Bank]

Great. And on Food slide, you quoted a – I wasn’t sure if it was like a margin gap or an availability gap of 6 points. And said that the industry’s is much lower. Is that truly on a like-for-like basis? Because clearly your mix to fresh and fast-moving lines makes it very uncomparable [ph]?

[Steve Rowe, Chief Executive Officer]

Yes. I mean we are obviously overweight in terms of our fresh comparisons with everyone else. And therefore, if you look to the business in total, it will be a forced comparison. However, specifically on fresh merchandise and specifically on present-day availability, there is a gap between us and the competition in terms of best in class. Now we did a lot of work to close up, but we’ve not really got to where I want us to get to. And there’s much more to do. And that’s the work that Lawrence Christensen and Stuart and the team are concentrating on now, yes.

[Archie Norman, Chairman]

Okay, thank you. Richard?

[Richard Chamberlain, RBC]

Good morning. Richard Chamberlain, RBC. So, a couple for me. The first one is on the Clothing side, Steve. The improvements that you’re talking about on the online offer, so front-end and service options, I guess, faster promised delivery times, that kind of thing. When can customers expect to see tangible improvements? Is that going to be a gradual thing? Or we have to wait sort of two years for things to catch up.

[Steve Rowe, Chief Executive Officer]

The front-end technology which unifies the view across all the different devices, that’s going to take a bit of time, about 6 months. And we’re working on that now, but once we land it, it will give us – every time we change it, it will automatically update all the different profiles. In terms of site speed, that is being worked on literally a daily basis. And we have really shown customers an improved PDP page speed, as I said, of under 3 seconds. The checkout work is a bit more complicated, and so is the search engine. And the search engine optimization.

So, the internal search, starts right at the beginning of product development. We go to right back to look at the key terms that were put into the system. So, I’m expecting that to take a little bit longer, but there are improvements literally bit by bit every day, much more to do. We’re a long way from best in class yet.

[Richard Chamberlain, RBC]

Okay, okay. And on the price cuts in Food, I wonder if you can just give a bit more color on are you going to be targeting in general terms any particular areas. Or do you feel you need to sort of broaden or revamp the value range? Can you just give a bit more color on what you’re thinking there, what needs to be done?

[Steve Rowe, Chief Executive Officer]

The key value indicators, the core items in the business are priced well against the competition. The drift has been in other areas, but it’s broad. It’s across pretty much every department. And that’s why it’s important that we reset values and when we undertake the category reviews. And in some of the cases, substantial movements take place, but we’re working, as I said, on things like packaging to offset that and also with the suppliers to make sure we get deficiencies out of the business and compete in their own way.

[Archie Norman, Chairman]

Okay. Thanks. Clive? Can we just re-cycle the mic front row, back?

[Clive Black, Shore]

Yes, Clive Black from Shore. Just on a very simple level, what do you think are the key drivers to sell more clothing at M&S?

[Steve Rowe, Chief Executive Officer]

All right. The first thing, Clive, we’ve got to get front right, yes. And we must make sure we’ve got the right product. And improving the design, merchandise and buying capabilities is something that Jill has been working on. And I’m delighted with some of the hires we’ve got in the business. We’ve got to get that right, first of all. The second thing is it must be displayed in the right environment. It must be accessible, whether it’s online or in store, to customers at all times.

And then you’ve got efficiency. The operation, right place, right time, availability, really key. The thing here is that online piece is really important. And at the moment, our search engine, as I said, is difficult. And in terms of our aspiration that was on our website, look, you can click on them if you like, it’s not good enough here. So, we’ve got to do a lot of work there because, in the future, all of the research is going to be done on a handheld device.

[Clive Black, Shore]

And just in terms of Food, you’ve expressed a lot of operational frustration, but where do you see M&S’ Food proposition now relative to the market in terms of what it stands for the level of innovation and the level of quality?

[Steve Rowe, Chief Executive Officer]

Yes. We’ve got a highly differentiated proposition. The innovation in the business is, frankly, the lifeblood. And I still believe that, but the innovation has to be relevant, relevant to our customers’ lifestyles at a price they can afford. If we get that right, it’s a world-class business, but we’ve got to get the focus right. And we’ve got to get the focus on to our families and customers who shop with us.

[Archie Norman, Chairman]

Okay, thank you. Yes, keep moving back.

[Pradeep Pratti, Credit Suisse]

Hi, there. Pradeep Pratti from Credit Suisse. Two questions. First, on Clothing, how much opportunity do you still have in direct sourcing in terms of moving to low-duty locations and things like that?

[Steve Rowe, Chief Executive Officer]

Okay, I mean, sourcing, I think I said this on November 2. One of the things that I think we should be grateful for is some first-class operations in our International sourcing division. We’ve got offices across the world. They tender against each other, and therefore we can compete broadly and use really the best locations for each garment. Most garments come out of multiple sources available to us, and so there are some options. The key thing here, though, is this is not all about driving margin. What we’ve got to do here is make sure we get great values. And as the world becomes more competitive, we’re going to have to be sharper on our relationship with suppliers; and that’s something M&S has historically done.

[Pradeep Pratti, Credit Suisse]

And second on Food. You haven’t talked much on the online side of Food and how the trials are progressing and what the next steps are.

[Steve Rowe, Chief Executive Officer]

Yes. We’ve seen the first sets of results. There are some interesting things, and what I want to do is have another look at some other options in terms of the offer to customers because I’m not going to rush into this. This is a business that is very difficult to make money in, particularly when you’ve got the construction of our ranges and our basket size. And once whilst we’ve seen some interesting things, it’s not a basis to make an investment.

[Archie Norman, Chairman]

Exactly. Okay, let’s move down the line, back on. And we’ll come back there.

[Andrew Gwynn, Exane]

It’s Andrew Gwynn from Exane. First question, just on the Food gross margin. I suppose it’s the most surprising aspect of the guidance. You obviously had a significant downward movement in the second half of last year, some price investment coming up, but can you just elaborate more on the self-help that you plan in the Food business to keep that within that guidance range? Thank you.

[Steve Rowe, Chief Executive Officer]

Yes. Again, I think I outlined some of this in November, but we’ve over-specified some merchandise. I mean let’s be clear. I think I talked about a champagne – a prosecco bottle which is 19p more than the competitors. That doesn’t change the quality of the merchandise inside it, so we don’t then need to downgrade. We can be more efficient. And I could cite examples across the Food group. There is packaging.

We’ve got inefficiencies in our run rates and manufacturing rates because of the small runs and availability. As we tighten the ranges up in Food, which you know Stuart is going to do, we’ll get more efficient in our production. And so, there’s a whole raft of measures, which we believe will be used to offset either in the costs of the goods; or in efficiencies for us to offset that price increase – that price decrease, yes.

[Andrew Gwynn, Exane]

Well, there is increase, but just on the second question then. I mean it sounds like a very simple question, but what’s the criteria for space closure? Are these stores that are maybe net present value negative? Are these stores may be making an EBITDA loss? Or is it simply just to do better in that location is it relocation?

[Steve Rowe, Chief Executive Officer]

No. I’m going to go back to that. We forensically examined the store estate based on a third of the business being online. We looked at it. We used gravity feed models. We fed them with where we believe there will be shop incentives in the future, so that – it’s traffic [ph] et cetera et cetera, with that format. We’ve continued to model customer movement around those and make sure that we’ve got a representation across the country. The key thing is, though, that the stores themselves have become marginal or loss making over a long period of time. They’re located largely on high streets, many of them over 70 years old. And they’re not of a scale we wish for the future. And importantly, they’re not investable here. These are stores we can’t afford to modernize.

[Archie Norman, Chairman]

We’re building the business for the 5 to 10-year future, so this isn’t just a piece of arithmetic. And we need to have a modern store portfolio that we want to trade out from growth in the businesses. Okay, who’s next? Yes – no, that way.

[John Stevenson, Peel Hunt]

John Stevenson of Peel Hunt. Just online. You talked about 5% growth. Is it a traffic issue, or a conversion issue? What was the traffic growth for the year? What’s the conversion rate? And where are people dropping out? What are the blocks to conversion?

[Steve Rowe, Chief Executive Officer]

It’s not actually a traffic issue. It’s a conversion issue at the moment. And that really feeds back into internal search in the website, not necessarily inspirational pictures; difficulty to navigate; et cetera. So, they’re dropping out in a number of places. And I also mentioned earlier that payment load speeds were too high. And that’s another place we see dropout, but like the rest of the business, we need to improve availability here as well. We need to make sure that we’ve got first – the first place and last place to buy things online. And again, that end-to-end supply chain work is going to be really important.

[John Stevenson, Peel Hunt]

And a follow-up: You mentioned about a sort of ship from store. How far away are you from mail to sort of give customers a genuine full-view stock and mail sort of ship from store?

[Steve Rowe, Chief Executive Officer]

We’re still working on that. I mean we have got – 72% of our merchandise ordered online is collected in stores, shipped from Donington. We have about – we’ve picked about 15% to 20% of orders, which are bought online and sourced in store, which at the moment that’s quite a clunky process. And we could not deploy that and to scale. Probably we need to do quite a bit of work there, but it is important for the future.

[Archie Norman, Chairman]

Okay, thank you. Yes? Sorry. I don’t know your name.

[Georgina Johanan, JP Morgan]

Thanks. It’s Georgina Johanan from JPMorgan. I have two questions; and both just brief clarification questions, please. Firstly, just in terms of the space closures, I appreciate that you’re decoupling your space closures from your relocations and so on, but can you just give us an update on what your expected net percentage square foot closure number is, please, versus the 10% previously discussed?

[Scilla Grimble, Interim Chief Finance Officer]

About the same.

[Georgina Johanan, JP Morgan]

The same.

[Steve Rowe, Chief Executive Officer]

Yes, basically.

[Georgina Johanan, JP Morgan]

And then second question, just on cash exceptional expectations of this year. Again, I understand that the sort of 200 million is unchanged, but presumably there’s other cash exceptions going through this year related to efficiencies and so on. So, if you could just share a number on that, it would be really helpful, please.

[Scilla Grimble, Interim Chief Finance Officer]

I think you’re going to have to take your own view in relation to the PPI piece because clearly the deadline for that is August next year. And we’ll see, sort of see what happens. For the rest, I would expect cash in about the region of 100 million in the year ahead, and that’s largely relating to things we’ve already flagged.

[Georgina Johanan, JP Morgan]

Okay, thank you very much.

[Archie Norman, Chairman]

Yes?

[Sanjay Vidyarthi, Canaccord]

Good morning. Sanjay Vidyarthi, Canaccord. On the mechanics of the store closures, can you say what proportion are freeholds, onerous leases and lease expiries? And then trying to understand within that, are you able to sell the freeholds? Or is this about subletting or leasing those out? And also, with the onerous leases, are there opportunities to sublet?

[Scilla Grimble, Interim Chief Finance Officer]

So, I can give some headlines. And I’m not going to break down. It’s all in its entirety. I think we said, when we announced this back in November 2016, there is a small element of freehold within there, but it’s not significant. So, you’re talking sort of GBP 50 million to GBP 100 million in terms of the scheme of things. And clearly the cash element of our charges predominantly relates to sublet shortfalls. And that’s why we’ve said it’s actually you’re going to see that over a fairly long period of time potentially.

[Steve Rowe, Chief Executive Officer]

And the broader point is, we do have a lot of property assets still. And our intention is to move towards a position, under Sacha, where we can start to manage these as you would manage an investment portfolio of properties. And there are opportunities there for us...

[Archie Norman, Chairman]

Yes. And we’ll take, should make it last question, unless somebody is going with exciting, other issues.

[Chris Chaviaras, Bloomberg Intelligence]

This is Chris Chaviaras from Bloomberg Intelligence. Two questions from me. The first one, on the management changes, can you give a bit of color of what practically changes in the way that you run the two businesses Food and GM? Because you had MDs there before. And I would imagine that they would be P&L accountable, so what has practically changed there? Do you split the support functions completely? Any color will be helpful.

[Steve Rowe, Chief Executive Officer]

Yes, broad. I mean they are running those businesses. Each of those has a management team, management board, which is responsible for that P&L. And you’ve got to remember that M&S was heavily matrixed with central functions that then spread into all the business areas. That’s gone. And with a few corporate functions that we need to bind this together, so data, things like Sparks, HR, where it’s important to keep those together.

Everything else is now sitting with Jill or with Stuart. And in International the same is true with Paul. He’s got clear line of sight of the P&L within his franchises. It means we can move faster. It means these guys have a clear accountability; and importantly, autonomy, freedom to make decisions quickly without having to keep referring it around those matrixes. And that’s what I mean by faster, lower-cost, more commercial Marks & Spencer.

[Chris Chaviaras, Bloomberg Intelligence]

Okay. And a second, brief question. What is the level that you think is sustainable for your marketing expense? And how do you view your marketing? Is that on an absolute level, or as a percentage of sales? Should it go down because you close space? Because you had another year where you saved more than 10 million there.

[Steve Rowe, Chief Executive Officer]

Yes. I mean the key thing here is, we will spend marketing money as we think it’s appropriate. I mean we’ve brought the number down. There are different routes to market now. Digital marketing is much cheaper than the sort of traditional marketing methods. And I know that Jill’s team and Stuart’s team are exploiting those. So, what we’ll do is make sure we get the right messages to our customers. And I would anticipate we’ll see further decreases, but however, as I said, the autonomy and the accountability with that sits with Jill and Stuart.

[Chris Chaviaras, Bloomberg Intelligence]

Thank you. Very helpful.

[Archie Norman, Chairman]

All right, good. I think we’ll call [indiscernible] but everybody, we’re very happy to stay around and answer any further questions, or at least Steve and the team are. All I just want to say in closing is thank you all for your time. I think, for me as Chairman, this is probably the most important presentation we’ll ever make because it is a single moment in our history. And although you can’t see in our trading the dramatic improvement at this juncture, and that will take much longer, the changes that are being made in structure, organization, Steve talked about these, are really formative for our future. And it is an exciting moment. Thank you.